Where in the World Investors Can Play the New EconomyCheck out these hot foreign tech funds. But don't forget to keep your risk meter handy

Only a few very broad, general statements can get U.S. investors excited about investing internationally. Here's one: Europe is at least two or three years behind the U.S. -- and Asia is a few years behind that -- when it comes to replicating the kind of high-tech, steady growth, low inflation New Economy that has spurred America's bull market. If foreign companies can foster a U.S.-style entrepreneurial spirit, the theory goes, stocks abroad will go through the same prolonged boom they've enjoyed in the U.S.

Investors got a taste of this in 1999, when segments of the Japanese small-cap and European technology markets were so strong that overall international markets outperformed the U.S. market for the first time in five years. The average foreign mutual fund was up 45%, while the average U.S. diversified fund was up 28%, according to mutual-fund tracker Morningstar. Some foreign funds that emphasized international small-caps earned returns in the triple digits.

"Certainly, we believe the New Economy is going global," says Cullum Clark, manager of Warburg Pincus International Small Company, which gained 216% in 1999 thanks in good part to his picks in the technology and telecom areas (which never topped 40% of his portfolio). "Wherever the rest of the world is behind the U.S., it is racing fast to catch up," he says. But there are also New Economy themes, such as wireless phones and electronic gaming, where other parts of the world are ahead of the U.S. "If you add it all up, yes, other countries are behind the U.S. on average," says Clark. "But they will get to where the U.S. is faster than the U.S. got there," says Clark.

THE FINEST FUNDS. Investors who want exposure to the global New Economy will find the easiest way to play this theme is via a foreign mutual fund. To come up with a list of top-performing funds most likely to continue to benefit from the New Economy, we used Morningstar Principia Pro Plus for Stocks to screen for funds that invest exclusively in foreign countries and that have more than 20% of assets in tech stocks. The resulting table ranks the top 15 such funds by three-year return. As in the U.S., foreign funds that have the most assets in technology tended to be among the top performers overall. All the funds that made our list had returns in the top 20% of their category for the past one- and three-year periods.

Several funds at the top of the list focused on small companies -- not because small-cap stocks had a broad recovery overseas, but because managers proved adept at stock-picking, notes John Ford, chief investment officer for Rowe Price-Fleming International. T. Rowe Price International Discovery fund was up 155% in 1999, with about a third of its assets in technology stocks.

Warburg's Clark says that while he made some good calls on industries and country weightings, the key to his fund's high returns were big winners such as Framtidsfabriken, a Swedish Web consulting firm, and Research in Motion, a Canadian maker of handheld Internet devices. Both stocks leaped by more than 10 times in the year. Says Clark: "1999 was the year in which everything went right." (His fund hasn't been around for three years, and thus didn't make our table.) For 2000, Clark has pared back on some of his technology winners and is emphasizing international growth stocks the market has ignored, including hotel chains, small-cap specialty retailers, and even some real estate companies.

LONG HAUL. Investors should keep in mind that betting on a global New Economy carries plenty of risks. First and foremost, the valuations of some New Economy plays are already "excessive," believes Ford. He thinks leading telecom, Internet, and tech companies that have strong management will continue to grow in 2000. Merrill Lynch's Global Research & Economics Group agrees. It concluded in its 2000 forecast, "Three investment pillars of technology, telecoms, and takeovers, although perhaps extended in the near term, will continue to offer opportunities, in our view."

Also, while spending on technology around the world is up, to build a high-productivity, low-inflation economy, foreign nations have to do a lot more than shell out cash. They'll need to restructure corporations, retool financial markets to support innovation, and in many cases, be slower to raise interest rates and quicker to deregulate. For risk-averse cultures, that's no easy task. Also, even if foreign economies can accomplish all this, a worldwide investment boom could trigger global inflation, shocking foreign markets.

The so-called New Economy that has fueled growth without igniting inflation and spurred on the stock market may eventually prove a purely U.S. phenomenon. But if Europe and Asia take advantage of technology to drive economic expansion, tech stocks and the funds that emphasize them, may prove well worth the risk.